THE WORLDPOST
04/03/2014 05:06 pm ET Updated Apr 03, 2014

Chinese Investment In U.S. Tech Booms Despite Cybersecurity Fears

Bloomberg via Getty Images

Chinese tech companies have splurged on major acquisitions of U.S. high tech firms in the first quarter of 2014, spending big bucks in pursuit of the markets, technology and talent found in the U.S., according to a report released Tuesday by the Asia Society and the Rhodium Group. But with cybersecurity questions driving a wedge in U.S.-China relations recently, the acquisitions are generating equal amounts of excitement and anxiety.

"This ought to be the most positive new trend in the bilateral economic relationship in several decades," said Daniel Rosen, co-founder of the Rhodium Group and co-author of the report. "Unfortunately there have been misapprehensions on both sides that took a really positive story and turned it into an anxious story, a fraught one."

Chinese firms have already spent $6 billion this year on direct investments in high tech firms in the U.S., surpassing their cumulative investment from 2009 to 2012, according to data collected by the Rhodium Group, an advisory firm that closely tracks these numbers. The direct investment includes the opening of new facilities as well as purchases of at least a 10 percent stake in existing companies.

The growing Chinese interest, including a recent high-profile acquisition of Motorola, comes as part of a broader boom in Chinese investment. Last year marked the first time that Chinese direct investment in the U.S. outstripped flows in the opposite direction, according to Rosen. But when executed in technology-intensive industries, otherwise straightforward investments can spark fears of new vulnerabilities on cybersecurity, the report said.

In recent years, the U.S. federal government has blocked attempted acquisitions of American companies by Chinese telecom juggernaut Huawei, labeling the firm a "national security threat" because of alleged ties to the Chinese government and military. But documents leaked by former NSA contractor Edward Snowden recently revealed that the NSA was building "back doors" into Huawei equipment to monitor communications. This is exactly what Congress had accused the Chinese government of doing on equipment in the U.S.

With ire building between Washington and Beijing, many have advocated a more localized approach to trade and investment relations.

Speaking Tuesday at a conference in San Francisco for the release of the new report, business leaders and China analysts agreed that states like California (which stand to benefit the most from investment in high tech) should take the lead in deepening ties with China.

"California is the perfect place to develop the best possible model for interacting with China on high tech or almost any other kind of investment," said Orville Schell, director of the Center on U.S.-China Relations at the Asia Society. "Washington is really irrelevant here. Not only irrelevant, but by and large if there’s going be trouble made, they’re going to make it. They’re the ones who generate the foul political atmosphere."

Despite the international wrangling over cybersecurity, many Chinese high tech companies dramatically expanded their footprint on U.S. soil. Chinese computer and smartphone manufacturer Lenovo has led the way, first announcing its U.S. arrival in 2005 with its landmark purchase of IBM’s PC division for $1.7 billion. This year, Lenovo followed up by spending billions of dollars on an IBM server division and Motorola. Those acquisitions, along with a Chinese firm's $150 million purchase of failing American electric car company Fisker, cap a multi-year rise in Chinese investment that the report’s authors say is starting to truly take off in 2014.

"There was very little activity before 2010, then a slight increase that signals a structural change, and looking forward there’s really a lot in the pipeline," said Thilo Hanemann, research director at the Rhodium Group and co-author of the report. "2014 looks to be a breakthrough year in terms of high-tech deals."

Analysts are quick to point out that even the record-breaking totals in recent years remain small compared with the vast sums of money flooding into U.S. tech fields. But they say the trend hints at shifts that could have dramatic implications for innovation in the U.S. and China for years to come. Chinese firms are arriving in states like California and North Carolina in search of the technology and talent that will help them survive changes brewing in the Chinese economy. As economic reforms aim to wean China off growth fueled by easy credit and low-end manufacturing, innovation has become the holy grail for private companies.

Along with cybersecurity worries, some analysts have raised fears that Chinese companies will take an extractive approach to U.S. tech. But the report played down the likelihood of a nightmare scenario in which American facilities would be shut down after Chinese investors made off with prized technology.

"In most of these cases where Chinese companies come in and acquire a U.S. company, they’ve actually increased local staff post-acquisition," Hanemann said. "That’s exactly why they come here, because there’s a lack of talented staff back in China and they’re trying to actively tap the talent here in the U.S."

Chinese tech firms are also attracted to investing in the U.S. because of its laws and intellectual property protections. Alan Chen, CEO of the online game company Perfect World Entertainment, chose to open U.S. operations in 2008 in order to access overseas markets insulated from Chinese politics.

"Because we’re in the culture-related business of video games, there’s a concern that the government may have different policies at different times, and that may really limit the market’s development in China," Chen said.

He pointed to the example of China’s video game consoles, which the Chinese government banned outright in 2000, citing worries about violent content. China’s State Council announced in January that it planned to lift this restriction in the newly opened Shanghai free trade zone, an area created by China’s new leaders to pilot reforms designed to invigorate the economy.

Analysts and business leaders say they hope that U.S. politicians and corporations can overcome fears about cybersecurity and Chinese advances in high tech fields. Rosen of the Rhodium Group said that openness to Chinese investment is the best route to maintaining America’s edge in innovation.

"There’s a temptation to think that we’re going to address our long-term competitiveness by how we address foreign investment at the border. Nothing could be further from the truth," Rosen said. "In fact, America’s long-term competitiveness depends on letting those foreign investors into our economy."

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